12 November 2014
Business property – an asset or a liability?
Most people think of renting a business property in the same way as renting a private home – we are preconditioned through our own experiences to correlate the two. But Sarah McLoughlin, property litigation lawyer at B P Collins LLP, believes nothing could be further from the truth.
Businesses change quickly – especially in economic recovery phases – and being saddled with the wrong property at the wrong time can often constrain business agility.
Business growth aside, there are often many parties involved in the business ownership that can further muddy the waters. Couple this with the fact that standard agreements affecting landlords and tenants are usually tailored from a template agreement to save time – but this could well be the wrong starting point as the agreement is manipulated to fit today's requirements, rather than starting from the position of documenting what has been agreed.
This is where going to the experts, and taking the approach of managing the long-term risk by starting at the right point, will pay dividends in the future. Commercial property lawyers will take time to understand not only today's requirements and the complexities of your individual set up, but will be able to lay out a road map and point out the potential dead-ends and blocks along the way.
So what are the pitfalls?
One of the most common mistakes is the tendency for organisations to wait until they've all but agreed a deal with a landlord before seeking professional advice. Starting the discussion at the wrong time can be damaging; negotiations may have focused solely on price and critical aspects may have been overlooked. At a basic level, organisations can end up paying too much rent. More damagingly, their inexperience can lead to them paying the far higher price of failure further down the line.
There are numerous additional considerations. How much of a rent-free period can you negotiate to allow you to move in and fit the premises to your specific requirements? Is there a service charge, and if so, is there potential for capping or limiting it?
Dilapidations are another important consideration. A property could, for example, be a listed building with a lead roof that becomes beyond reasonable repair and needs replacing. A landlord will undoubtedly want to pass those repair costs onto a tenant. Although there will be a number of get-outs, the cost of finding them – reactively – will not be insignificant. Proactive advice, on the other hand, is priceless.
Sometimes disputes can appear to be outside of a tenant's control – not least in multi-tenanted premises. For example, taking an assignment on premises that already have tenants in occupation of other parts of the building is not uncommon. However, in some cases, organisations can find themselves indirectly exposed if their agreement stipulates vacant possession of the whole building at the end of the term. In such cases, even parking spaces can present a challenge; in instances where someone has innocently forgotten an imminent lease expiry and parked overnight, a tenant can face legitimate arguments about whether vacant possession has actually been delivered up.
The importance of building flexibility into lease assignments cannot be overstated. Organisations should avoid agreements that commit them for lengthy periods of time and, where appropriate, negotiate short-term leases or break clauses. Likewise, businesses should beware of contracts that are too difficult to exit; disposing of a property is as important as acquiring one – and it's vital to establish sensible exit terms up front.
The casual notion that commercial property is one of the most straightforward aspects of business ownership is a myth. The smartest organisations are not those that try to be clever by doing it alone, but those that acknowledge its many pitfalls and partner with a trusted adviser to ensure they avoid them.